Trading Basics covers the fundamental concepts required to start trading in financial markets. Understanding these terms is essential for both beginner and intermediate traders.
Lot size is a trading unit. For example, 1 lot of London gold is 100 ounces, and 1 lot in FOREX trading represents 100,000 base currency instead of 100,000 dollars. If your base currency is the US dollar, 1 lot represents USD100,000; if your base currency is the Euro, 1 lot means EUR100,000.
A “pip” denotes the minimum unit of change in the price of a financial instrument. In most cases it refers to the last decimal or digit of the price of a financial instrument. For example, if the price of EUR/USD was 1.13452 /1.13460 (bid price/ask price) and it changes to 1.13482 / 1.13490, the price has changed by 0.00030 or 30 pips. The value of a pip can be calculated using a 100,000 unit contract, with examples showing the calculation for USD/JPY, USD/CHF, and EUR/USD.
The spread is the difference between the ask price (the price at which you buy the base currency) and the bid price (the price at which you sell the base currency). For example, the EUR/USD quote is 1.13452/72, and the spread is the difference between the ask and bid price, representing the client’s trading cost.
Leverage allows you to trade beyond your account funds. For example, with a leverage of 1:50, a $1,000 balance gives you the ability to control up to $50,000 worth of an asset, enabling you to make larger trades with less capital.
A “2%” leverage (or 1:50) means that a 1% change in the price of the asset will produce a 50% change in the price of the CFD. For example, a $1,000 balance with a 1:50 leverage ratio has a trading ability of $50,000.
Margin is the amount of capital required to open a leveraged position. When you open a position, a percentage of the total value of the trade is set aside as margin. This varies based on the leverage ratio and the trade size.
Initial margin = contract value of open position at opening price * initial margin ratio. For example, with a leverage of 200:1 (0.5% margin), if you open a mini-lot position, you only need to provide $50 as initial margin ($10,000 * 0.5% = $50).
Maintenance margin is the minimum amount required to maintain an open position. It is calculated as contract value at opening price * maintenance margin ratio (typically 50% of the initial margin ratio).
When you hold a position overnight, interest is either charged or credited to your account depending on the currency pair you trade. If you buy one currency and sell another, you might earn or owe interest based on the difference between the interest rates of those currencies.
Balance = Deposit – Withdrawal + Realized Total P/L of closed positions, excluding P/L of current open positions.
Equity = balance + unrealized total P/L of open positions + overnight funding. Equity represents the current value of your account including any open positions and the unrealized profit or loss.
Balance does not include unrealized profit or loss from open positions, whereas equity reflects the current value of your account including both realized and unrealized profits/losses.
Profits and losses are calculated based on the difference between the opening and closing prices of your positions. For long positions: (current sell price – opening price) * trading lot * contract size. For short positions: (opening price – current buy price) * trading lot * contract size.
Available balance is the amount remaining after deducting the initial margin and unrealized P/L of open positions. It represents the funds available for opening new positions or withdrawing from your account.
A stop-loss order automatically closes your position at a specified price to limit potential losses. The order will be triggered when the price reaches or surpasses the stop-loss level, although "slippage" may occur in volatile markets.
A trailing stop order locks in profits as the market moves in your favor. It automatically adjusts the stop-loss level in the direction of your trade, helping to protect profits while allowing the position to remain open if the market continues to move favorably.
The Foreign Exchange (FOREX) market is the largest financial market globally, with a daily trading volume of $4 trillion. It is considered the world's most important financial market, providing significant opportunities for traders and investors.
The foreign exchange (“FOREX” or “FX”) market is the largest financial market in the world. It surpasses the New York Stock Exchange (with a daily trading volume of $100 billion) by trading up to $4 trillion daily. This immense volume creates many opportunities for those involved in FOREX trading.
FOREX trading typically involves low costs, with no commissions or fixed unit quantity. The primary cost is the spread. It is a 24-hour market, meaning investors can trade at any time. Unlike stock markets, no single investor dominates the FOREX market. Additionally, trading often uses leverage, allowing traders to control a large amount of currency with a small margin. This can lead to high profits but also amplified risks. FOREX trading is accessible due to high liquidity, low entry barriers, and a variety of available tools. However, margin FX and CFD trading carries a high level of risk and is not suitable for all investors. Please read the Risk Disclosure Statement before starting trading.
Many factors influence the medium and long-term trends of the FOREX market, such as interest rates, GDP, US non-farm payrolls (NFP), CPI, PPI, durable goods orders, unemployment claims, industrial production, trade balance, and retail sales. Discrepancies between expected and actual data can significantly affect currency pairs.
There are a variety of FOREX currency pairs to choose from. Traders typically begin with major currency pairs, which involve the US dollar. Popular pairs include EUR/USD and USD/JPY, as these currencies represent economically significant countries with high trading volumes. These pairs also experience significant volatility and have frequent economic news releases, making them easier for investors to analyze.
Yes, FOREX trading involves buying one currency while simultaneously selling another. Transactions are executed in pairs, such as AUD/USD or GBP/JPY. A currency pair is quoted with the base currency on the left and the counter currency on the right.
The main participants in the FOREX market include commercial banks, which are the primary drivers of the market, as well as FOREX brokers who provide trading services for a fee or commission. Other participants include importers, exporters, tourists, multinational corporations, central banks, and FOREX speculators. CFD trading involves brokers, speculators, liquidity providers, and exchanges.
FOREX is quoted in pairs, such as GBP/USD or USD/JPY. In each transaction, you are buying one currency and selling another. For example, with GBP/USD = 1.51258, the currency on the left (GBP) is the base currency, and the one on the right (USD) is the counter currency. If you buy GBP/USD, you are purchasing the base currency and selling the counter currency. If you believe the base currency will appreciate relative to the counter currency, you should buy it. Conversely, if you think the base currency will depreciate, you should sell it.
Commodities are raw materials extensively used in industries or agriculture, traded on a wholesale basis. They are categorized into three main groups: Energy, Basic Raw Materials, and Agricultural Products.
Commodities are raw materials essential for industries or agriculture, traded in bulk rather than retail. They are classified into three categories:
Commodity trading can protect investors from inflation, which negatively impacts traditional investment products. When inflation rises, returns from bonds and similar products decline, while commodities tend to perform better. The value of commodities increases with the price of goods and services, offering a hedge against inflation. As a result, including commodities in a portfolio may help minimize losses due to inflation. Please note that CFD trading carries a high level of risk and may not be suitable for all investors. Please read the Risk Disclosure Statement before engaging in trading.
The supply and demand of commodities play a key role in price fluctuations. For instance, in the oil market, if supply is high but demand remains unchanged, oil prices may fall. However, geopolitical factors, such as tensions in the Middle East, often disrupt oil supply and create scarcity, driving prices higher. Inflation also influences commodity prices, as currency depreciation due to inflation increases the cost of goods, which subsequently drives up the price of commodities.
When beginning commodity trading, gold and crude oil are common starting points. Gold is considered a reliable hedge against inflation, as its value tends to rise during periods of political instability or economic downturns. It serves as a safe haven during global crises. Crude oil is also a popular choice, with its prices influenced by global supply and demand factors. Monitoring international news can provide valuable insights into oil price fluctuations, giving investors ample opportunities for profitable trades.
A stock index is a collection of data on multiple stocks that reflects the value of those stocks in the market. It shows the common characteristics of the constituent stocks, such as stocks traded on the same stock exchange, in the same industry, or with similar market capitalization. There are three main types of stock indices based on their calculation methods.
A stock index is a statistical measure that represents the overall performance of a group of stocks. The main types of stock indices are:
Trading stock indices allows investors to gain exposure to the overall market without being exposed to specific stock risks. It offers the opportunity to track the trend of the most active stocks, and you can profit whether the market rises or falls. Stock index CFDs allow investors to trade smaller contracts, making it easier to invest in a basket of stocks at lower costs. This provides a more accessible way to enter the market. Please note that CFD trading carries a high level of risk and may not be suitable for all investors. Please read the Risk Disclosure Statement before engaging in trading.
Several macroeconomic factors influence stock indices:
When selecting a stock index for trading, it's important to consider factors such as the market's economic conditions, government policies, and monetary directions. You should also understand technical trends in the stock index, including bull and bear cycles. If you are familiar with certain stocks or a specific country's economic conditions, trading the local stock index may be suitable. You can also assess the average daily trading volume of stock markets related to the indices to determine the best market for you.
Corporate actions refer to events that significantly affect a company's stock price. One common corporate action that impacts stock indices is dividend distribution. If you hold a buy order for a stock index after the dividend distribution date, you will be entitled to the dividend. Conversely, if you hold a sell order, you will need to pay the dividend.
Cryptocurrency is a digital or virtual currency that uses cryptography for security. The world’s first cryptocurrency, Bitcoin, was launched in January 2009, followed by various other cryptocurrencies in subsequent years. Each cryptocurrency transaction is encrypted. The sender and the recipient are identified by a series of numbers, and the flow of each cryptocurrency is stored in a public account called a blockchain to ensure the security of each transaction. Cryptocurrencies can be used for purchases or investments, with their value rising or falling in response to market variables. Unlike traditional currencies, cryptocurrency transfers do not require names or intermediaries such as banks, making them anonymous and private, with low or no fees.
The first cryptocurrency, Bitcoin, was invented by Satoshi Nakamoto in 2008. It became the most popular of the approximately 780 cryptocurrencies in circulation today. Bitcoin was launched in 2009 at a price of $0.008 per Bitcoin. Nakamoto's motive was to create an open-source, peer-to-peer electronic money system that operates without a central server, removing the need for a central authority to issue currency. This decentralized system is based on program encryption rather than subjective trust. Traditional currency systems require trust in central banks, but the 2008 global financial crisis, where central banks printed large amounts of money, led to a loss of faith in fiat currencies, prompting people to turn to decentralized cryptocurrencies.
There are two main reasons for trading cryptocurrencies:
Cryptocurrencies are highly volatile, which can lead to significant profit opportunities for experienced traders who understand these price fluctuations.
Several factors influence cryptocurrency prices:
When selecting a cryptocurrency to trade, consider the underlying technology and future potential. Some cryptocurrencies to consider include:
When trading Bitcoin CFDs (Contracts for Difference), you do not actually own the underlying Bitcoin. Unlike trading real Bitcoin, CFD trading does not require a Bitcoin wallet, and you do not need to use a cryptocurrency exchange. In CFD trading, you can either take a long position (buying) if you expect the cryptocurrency’s price to rise, or a short position (selling) if you expect it to fall. This trading method allows you to profit from price movements without owning the physical asset.
Fundamental analysis involves evaluating economic, social, and political factors that influence market demand and supply. Investors who use this method aim to understand factors that drive economic growth or decline. The core idea behind fundamental analysis is that a country's currency will be stronger if its economic outlook is good. A strong economy attracts foreign investment, which leads to an increased demand for the local currency. For example, if the US economy is improving, investors may expect higher interest rates, making dollar-denominated assets more attractive, thus pushing the value of the US dollar higher.
Fundamental analysis has several key advantages:
Fundamental analysis is widely used to understand currency movements, particularly based on interest rate expectations. Key factors include:
Fundamental analysis looks at macroeconomic conditions to predict trends and exchange rate changes based on market-driving factors. A stronger economy typically leads to a stronger currency, while a weaker economy leads to a weaker currency. As the US dollar is the world’s primary trade and settlement currency, economic conditions in the United States have a significant impact on the global foreign exchange market. Key economic data includes:
The economic calendar is an essential tool for fundamental analysis. By tracking key economic events and data releases, traders can anticipate market moves. For instance, if you want to trade the USD/JPY pair, you would focus on economic data from the US and Japan. The economic calendar allows you to plan your strategy and trade based on upcoming events over a defined time frame, such as the next two weeks.
Price fluctuations should ideally reflect all available market information, but in reality, not all investors react the same way. Sometimes, market sentiment needs to be analyzed. By examining trading data, including long and short positions, investors can gauge whether the market sentiment is bullish or bearish. Understanding market sentiment helps in analyzing trading trends and making more informed decisions.
Technical analysis is a method used by investors to study price fluctuations and predict future price trends. It assumes that all the information available in the market is already reflected in price movements. Investors use historical price data and charts to identify trends and patterns that may provide trading opportunities. The more investors use technical analysis, the more likely the market will display recognizable patterns that can be leveraged for trade decisions.
Technical analysis has several key advantages:
Technical analysis involves various tools and indicators that help investors assess the market. Some commonly used indicators include:
Technical analysis predicts future price movements by studying historical price data and trading volume. It relies heavily on charts and formulas to determine trends, cycles, and potential buy/sell opportunities. Depending on the time frame of analysis, traders can choose to perform intra-day, weekly, or monthly technical analysis.
